While a six-figure inheritance or high-paying job can land you in the top 1% of earners, it’s the little things — your money habits — that often make the difference between a life of prosperity and one of constant financial stress. If you look at the average amount of money you will earn over your lifetime, and figure out how many years you are working — most people earn more than a million dollars over their working life but very few people become millionaires. How they manage what goes through their fingers usually makes the difference. So what are these easy changes that can help move you further along the road to prosperity?
- Reverse Your Thinking
We know: After taxes are taken out and the bills are paid, your paycheck can seem a little anemic — which can make the idea of having to save for retirement too seem like a real stretch. But to build wealth, a change in mindset is required. Namely, instead of spending the rest of your take-home pay, you’d actually take another cut of your paycheck and put it toward your biggest financial goals.
Most people spend some money, pay their bills and save what’s left. And that’s backwards: You should be saving for your financial goals first, paying your bills and and then consider spending the money you have leftover. Another trap is putting your good money habits off till “later,” when life will get easier. The thing is, somehow the minute your income increases, the demands on your money seem to as well.
Now, keep in mind, we’re not suggesting you sock all of your money away and live on rice cakes in order to build wealth. I’m not asking you to put $1,000 away a month, I’m asking you to put away $50, or a small amount that you can afford. We really can’t underestimate the power of starting small, because most of the time that momentum builds, and once we see progress, we tend to repeat behaviors.
2. Look Where You Want to Go
Just as performance athletes imagine themselves making the shot over and over again knowing what you want your money to do for you gives your goals a better chance of being reached.
To get going on saving for the future, financial experts often suggest having a five-year plan to building wealth, where you create specific money goals you’d like to achieve in five years and what you need to achieve those goals. For example, saving six months of income for an emergency fund, or saving for a big event, like a down payment on a house.
Anytime we have a specific goal in mind, it helps us to save. Whether that goal is emergency savings, or saving for a trip, or saving for college, or building wealth, it doesn’t matter.
- Live Like a “Secret” Rich Person
For some, the image of a millionaire conjures visions of sprawling mansions and shiny Bentleys. But most millionaires don’t live large like that — rather, they tend to live well below their “means” and do more saving than spending. In other words, they’re not flashing their wealth, according to Dr. Thomas J. Stanley, co-author of “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.” Stanley’s book, which details more than two decades worth of surveys and personal interviews with millionaires, reveals that much of the wealth in America is more often the result of hard work, diligent savings, and living below your means.
Las Vegas–based David Sapper, who owns a successful used car business, and his real-estate broker wife make a combined income of $500,000 per year. Yet they live like “secret” rich people, only spending $2,500 per month on all bills and extracurricular expenses like eating out, unlike many of their peers. By putting 90% of his income into savings and investments, Sapper says he’ll be able to retire early.
- Tackle Retirement Now
If you’re in your twenties or thirties, retirement can seem eons away — and saving for it might not seem like a priority. Unfortunately the later you start saving, the more you’ll have to save. But the sooner you sock money away, the more time it has to compound and grow.
If, for example, you’re 30 and putting $50 a month into a retirement account with a 7% rate of return, that $50 a month would turn into $56,000 in 30 years, says Blaylock. Should you wait to age 40, you would need to contribute $110 per month to get to that same goal. This is because your money has less time to grow which minimizes the impact of compound interest
- Know What’s Coming in, and What’s Going Out
Most of us have good intentions when it comes to saving money. But if you don’t know what’s coming into your bank account and what’s going out, chances are you don’t know how much you can devote to your goals. And most people generally don’t track their income and spending. It really is shocking to me that clients I work with don’t always review their pay stub.
- Getting Out of Debt
Everyone has debt at some point in their life. But if you have bad debt — not student loans and mortgages, but credit card debt, where you’re paying high monthly interest rates — nixing it and getting out of the habit of being a debtor — should be priority number one.
At the same time, emergencies happen. That’s why you should put half the money you could put into paying down debt into an emergency savings account. So, for example, instead of paying $600 toward credit card debt, consider putting $300 toward emergency savings and $300 toward credit card payments. While this means it will take longer to get out of credit card debt, you’ll have money stored up for an emergency.
After you get out of debt, have only one credit card, and come to an agreement with yourself (or your significant other) that it will only be used during an emergency. Let’s say the car broke down and you can’t fix it — that’s an emergency. Something’s on sale, and I know I’m going to need it in six months — that’s not an emergency.
- Increasing Your Earnings
There are two ways to increase your net worth: Spend less or save more money. And spending less is only part of it — you have to save, and when appropriate invest, the rest. Earning more often doesn’t lead to higher net worth because lifestyle expenses grow along with it. But if you grow your income, and set some of those earnings aside, you can grow your bottom line.
Diversify your income streams by working a second, part-time job doing something you love. As far as earning more, there are a few things one can do. For those who cannot cut their expenses enough, I love the idea of working part-time. I have a great friend who is an attorney. She has a big travel habit that she is unwilling to pull back on. So, she works at a flower shop on Saturdays during wedding season. It’s a win for everyone: The flower shop has a dependable employee, and my friend loves flowers so she does not think of it as work.
Look for investment opportunities — perhaps with the help of a financial planner — or other ways to get income to come to you. I think retirement income should come from multiple sources such as rental income, part-time income and retirement assets.
